Plenary 2 - Energy Regulation and Economic Development: Economics, Environment, and
Social Equity
Energy Regulation and Its Relation to Environmental Sustainability
Dr Péter Kaderják
President, Energy Regulators Regional Association
Extraction of energy sources, production of electricity and other energy products and their
distribution to final consumers are basic products and services provided to the society. Some
features of energy markets, especially market failures in the form of monopolies and
oligopolistic collusion gave rise to economic regulation in the electricity, gas and crude oil
sectors centuries ago. Present energy regulatory institutions (agencies, commissions) carry
out what is called economic regulation of the sector. Major elements of economic regulation
are price, quality, quantity and entry/exit regulations.
The energy sector is a major contributor to the most pressing – global and local environmental problems in the form of land degradation and contamination, nuclear waste
generation, local air pollution and greenhouse gas (GHG) emissions. As the global
environmental sustainability issue was put close to the top of the political agenda in the
developed world of the time, the 1970s experienced a vital development of environmental
regulations of numerous economic sectors, including the energy sector.
However, contradictions between the means and ends of economic vs. environmental
regulation of the energy sector are common experience of professionals in the field. For
example, a major piece of economic regulation of electric utilities aims at protecting
consumers from monopolistic pricing of utilities. This aim is achieved by applying average
cost or Ramsey pricing. Such a regulation leads to increased production from and decreased
price of electricity compared to the unregulated (and polluting) monopoly case. The major
piece of environmental regulation of point source polluters (the typical power plant) aims at
protecting consumers from increased emissions. This aim is achieved by constraining the
quantity of emissions by setting emission standards for major pollutants. Since emissions are
proportional to production, such a regulation leads to decreased production from and
increased price for electricity. The joint effect of the price/quantity regulation mix, if applied at
the same time, might be unclear and might turn out to be inefficient.
There are numerous other recent problems in the sector, where the scope of economic and
environmental regulations -- and sometime also taxation policies -- overlap each other.
Security of supply has become a central piece of regulatory concern for liberalized electricity
markets worldwide. This problem has a close relevance to exit/entry regulation applied by
both economic and environmental regulators. The California electricity market failure
illustrates clearly that a coherent economic and environmental regulation on entry could have
largely helped to prevent supply-side problems.
But the shaping of renewable energy support schemes including pricing policies, the
development of GHG regulation policies, understanding the regulatory consequences of the
energy sector liberalization processes, or the implementation of energy taxation schemes are
other examples of common concern for the two groups of regulators.
Given the common conceptual basis of (normative) welfare economics for the economic and
environmental regulation of the sector, regulatory contradictions ask for explanation and
correction in order to pursue public policy goals in a coherent manner. A coherent public
policy goal in this case could be to regulate the industry in a way so that it is sustainable both
from a business and from an environmental perspective.
A potential explanation for the lack of coherence in regulation at present is institutional in
nature. Economic and environmental regulators are separate institutions with great difference
in regulatory history and culture. Also, if Stigler’s economic theory of regulation is valid to
some extent, economic (energy) regulators and environmental regulators are “captured” by
separate industrial groups: economic regulators by the “traditional” energy utilities,
environmental regulators, on the other hand, by the industry manufacturing environmental
and renewable technologies.
The presentation will discuss existing contradictions between economic and environmental
regulations of the energy sector and will conclude with proposals on how such contradictions
could be reduced in order to improve the sustainability of the sector from both a business as
and an environmental point of view.